Home Builders Hammered by Housing Data

NEW YORK ( TheStreet) -- The housing market has been a bright spot in what has been a tepid economic recovery. That changed over the past two days with weaker-than-expected housing starts and home builder sentiment.

I have been warning that the rebound in home builder stocks was ahead of the improved housing data, most notably with extremely elevated P/E ratios. Even after Wednesday's price decline the twelve month trailing P/E ratios are between 25.2 and 41.1 as shown in today's table of home builder stock data.

While home builder stocks surged, single family housing starts began to struggle at an annual rate of 600,000, and the National Association of Home Builders (NAHB) Housing Market Index (HMI) set a plateau below the neutral reading of 50.

On Wednesday morning, we learned that housing starts fell 8.5% to an annual rate of 890,000 in January with building permits up 1.8% to 925,000. The important single-family starts rose just 0.8% to 613,000, which is slightly above the 600,000 threshold that reflects a neutral housing recovery.

On Tuesday morning, we learned that the NAHB HMI slipped to 46 from 47 in February, leveling out below the neutral reading of 50. The causes for the pause includes uncertainty about the job market and home buyer access the mortgage credit. Some builders cited rising costs for building materials, limited availability of labor and desired lots.

Pre-market Wednesday morning, home builder Toll Brothers Inc ( TOL) reported that they missed EPS estimates by nine cents, earning just two cents. In addition revenue at $424.6 million was well below the average estimate of $502.17 million. This caused a wave of selling among the home builder stocks I have been tracking.

My benchmark for the home builder industry is the PHLX Housing Sector Index ( HGX), which plunged 5.5% on Wednesday to 179.51. The daily chart for HGX had been showing a topping out pattern since the end of January despite setting a multi-year high at 194.06 on Feb 13. HGX broke below its 21-day simple moving average (SMA) at 188.71 and closed Wednesday just below its 50-day SMA at 180.11 with the 200-day SMA at 153.60, which lines up with my semiannual value level at 152.56.

Chart Courtesy of Thomson / Reuters

On Jan. 17, I wrote Overvalued Home Builders Face Earnings Hurdle and provided my "buy and trade" strategies pre-earnings for the eight home builders I have been covering.

On Jan. 28, I wrote Will Homebuilders Q4 Support Additional Share Price Strength? In this post I honed in on earnings from four home builders and two other stocks that provide services to home building.

On Feb. 4, I wrote Book Profits in Overvalued Market , and profiled four home builders and six other stocks related to home building and the construction sector. My strategy presented in this post is to use a "buy and trade" strategy to book profits on strength, and raise cash while doing so.

The construction sector was the most overvalued sector, by 26.9% yesterday, but today is 23.3% overvalued, falling behind consumer staples at 24.1% overvalued. At www.ValuEngine.com, we still show that 15 of 16 sectors are overvalued, 11 by double-digit percentages.

D.R. Horton ( DHI) ($21.93 vs. $23.35 on Feb. 4) set a multi-year high at $24.66 on Feb. 12. With this strength, investors had the opportunity to book profits and raise cash at my monthly risky level at $24.10. The daily chart is negative and the weekly chart shifts to negative on a close this week below the five-week modified moving average (MMA) at $21.96. My semiannual value level is $20.50 with the monthly risky level at $21.92.

Hovnanian ( HOV) ($5.29) is well below its Jan. 2 high at $7.43. The daily chart is negative and the weekly chart is negative given a close this week below the five-week MMA at $5.74. My quarterly value level lags at $2.89 with a weekly pivot at $5.31 and semiannual risky level at $6.00.

KB Home ( KBH) ($18.03) set a multi-year high at $20.04 on Feb. 12. The daily chart is negative and the weekly chart shifts to negative given a close this week below the five-week MMA at $17.63. My semiannual value level lags at $10.77, with a weekly pivot at $20.13 and monthly risky level at $21.35.

Lennar ( LEN) ($37.18 vs. $41.07 on Feb. 4) set a multi-year high at $43.33 on Jan. 28. The daily chart is negative and the weekly chart stays negative on a close this week below the five-week MMA at $39.59. My semiannual value level is $36.03 with a weekly risky level at $42.74.

PulteGroup ( PHM) ($18.60 vs. $20.35 on Feb. 4) set a multi-year high at $21.97 on Jan. 28. The daily chart is negative and the weekly chart shifts to negative with a close this week below the five-week MMA at $19.34. My annual value level lags at $14.00, with this week's risky level at 21.50.

The Ryland Group ( RYL) ($34.29 vs. $38.46 on Feb. 4) set a multi-year high at $43.00 on Jan 30. The daily chart is negative and the weekly chart shifts to negative on a close this week below the five-week MMA at $36.91. My quarterly value level is $28.90 with a weekly risky level at $40.17.

Standard Pacific ( SPF) ($7.54) set a multi-year high at $8.69 on Feb. 1. The daily chart is negative and the weekly chart shifts to negative on a close this week below its five-week MMA at $7.75. My semiannual value level is $7.36 with a weekly risky level at $8.69.

Toll Brothers ( TOL) ($33.56) set a multi-year high at $38.36 on Jan 29. The daily chart is negative with a weekly chart that shifts to negative given a close this week below the five-week MMA at $35.03. My annual value level is $31.95 with a monthly risky level at $38.70.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.